TPAS - The Pensions Advisory Service

Triviality

If the value of your pension rights is below a certain level, it may be possible to give up those rights in exchange for a cash sum.

From 6 April 2006, this option is only possible where the total of all your pension rights does not exceed 1% of the Lifetime Allowance. For the tax year 2008/09, this will equate to £16,500.

There are different ways of valuing existing pension rights to test against this threshold.

• Pension rights (not yet in payment) from a defined benefit scheme – The accrued pension is valued using a factor of 20:1.

For example, if you have a pension of £10,000, its value is £200,000 (£10,000 x 20).

• Pension rights (not yet in payment) from a defined contribution scheme (including personal and stakeholder schemes) – The market value of the fund is used.
• Pension already in payment before 6 April 2006 – The pension in payment as at 5 April 2006 is valued using a factor of 25:1 and then uprated against the Lifetime Allowance in the year of the test.  For reference, the Lifetime Allowance is £1.5m for the 2006/07 year and rises to £1.6m (2007/08), £1.65m (2008/09), £1.75m (2009/10) and £1.8m (2010/11).

For example, you start receiving a pension of £1,200 in 2001.  As at 5 April 2006, it has increased to £1,500.  Its value at 5 April 2006 is £37,500 (£1,500 x 25).

If the test for triviality purposes is carried out in 2010/11, when the Lifetime Allowance is £1.8m, its true value is £45,000 (£37,500 x £1.8m/£1.5m).

• Pension put into payment on or after 6 April 2006 – The pension is valued against the Lifetime Allowance in the year of payment.  That value is then assessed against the Lifetime Allowance in the year the triviality test is carried out.  For reference, the Lifetime Allowance is £1.5m for the 2006/07 year and rises to £1.6m (2007/08), £1.65m (2008/09), £1.75m (2009/10) and £1.8m (2010/11).

For example, you receive a lump sum of £2,000 and a pension of £500 a year in May 2006.  The value of these benefits is £12,000 (£500 x 20 for the pension and £2,000 for the lump sum).  That is 0.8% of the Lifetime Allowance in that year.

If the test for triviality is carried out in 2010/11, when the Lifetime Allowance is £1.8m, its true value is £14,400 (0.8% x £1.8m).

The option to cash-in a small pension can only be exercised between the ages of 60 and 75.

If you wish to cash-in more than one pension, assuming you meet the qualifying crieria above, you must do so within 12-months of cashing-in the first one.  You will not be able to cash-in any pensions after that 12-month period has expired.

If you do cash-in a pension under triviality rules, a quarter of the cash paid is tax-free with the remainder treated as taxable income in the year it is received.

The cashing-in of rights under an occupational scheme will be subject to the agreement of the scheme's trustees.

Q & As

When does the 12-month period start?

The 12-month period runs from the date the first small pension is given up for cash. No further small pensions can be given up for cash once this 12-month period ends.

I have pension plans worth £8,000 and £9,000. As they are both under £16,000 can I cash them in?

No. As both plans together exceed 1% of the Lifetime Allowance, the maximum level of cash that can be taken is limited to 25% of the capital value. If a cash sum of more than 25% of the capital value is paid, the payment will be unauthorised and will be subject to a 40% tax charge on the member and other tax charges on the scheme.

I held benefits in a scheme that wound up, which were cashed-in because they were trivial. Do I need to take these into account if want to cash-in other benefits?

If your benefits were cashed-in on a non-voluntary basis it will not affect your ability to cash-in other benefits on trivial grounds and will not count towards your 1% limit or Lifetime Allowance.

I have an occupational scheme with a pension of £700 per annum, due in 2010, and a small personal pension plan in which I have only £3,000. Can I just cash in the £3,000?

No. The value put on the occupational scheme is £14,000 ((£700 X 20) which when added to the £3,000 gives a total in excess of £16,500.

I have a small personal pension which only has contracted out rebates paid into it and is worth £6,000. I have no other pensions. Can I encash this contracted out plan?

Yes, even protected rights pensions can be taken as trivial lump sums.

I want to cash in a small occupational pension of £600 p.a. I thought they had to value this at 20:1 but the lump sum they are offering me is much smaller.

The 20:1 is only a valuation factor used for the purposes of testing whether all your pension plans together add up to no more than £16,500 (for the tax year 2008/09). The actual cash value offered by the trustees is on whatever basis is recommended by the scheme actuary.

My former occupational pension scheme is being wound up and they are paying out my pension as a cash sum because it is small. I am only aged 45 and I have a personal pension plan worth £30,000. Can they do this?

Yes, on wind-up of an occupational pension, the lower age limit of 60 is waived and there is no aggregation with other pension benefits to test against 1% of the lifetime allowance.